What is a tax deduction?

Published Friday 24 July 2026

Table of contents

• Tax deductions (definition)
• How do tax deductions work in Hong Kong?
• What business expenses are tax deductible?
• Expenses that are not tax deductible
• Keeping records for your tax deductions
• Keep on top of your deductible expenses with Xero
• FAQs on tax deductions
• Related terms
• Learn more about tax deductions

Key takeaways

• A tax deduction is a business expense that lowers your taxable income, so you pay less tax.
• In Hong Kong, businesses are taxed under profits tax and individuals under salaries tax, and the deductions differ between them.
• Under profits tax, expenses are generally deductible if they're incurred in producing your chargeable profits and aren't capital in nature.
• Keep your receipts and invoices, and hold your business records for at least 7 years as required by the Inland Revenue Ordinance.

Tax deductions (definition)

A tax deduction is a business expense that can lower the amount of tax you have to pay. It's deducted from your income to arrive at your taxable income, and it's sometimes called a tax write-off.

Here's how it works in practice. Jo owns a photographic studio. She made HK$770,000 last year and has HK$150,000 of expenses she can deduct, so her taxable income for the year is HK$620,000.

To count as a tax deduction, an expense must have a legitimate purpose within your business. Buying a camera is a legitimate business expense for a photographer, but probably not for a baker.

You can't deduct personal expenses, like your groceries. But if an expense is partly personal and partly business, you can generally claim the business share. If you buy a new mobile phone and use it for business 80% of the time, you may be able to deduct 80% of the cost.

How do tax deductions work in Hong Kong?

Hong Kong taxes businesses under profits tax and individuals under salaries tax, and the deductions you can claim differ between the two. Knowing which one applies to you helps you claim the right expenses.

Under profits tax, an expense is generally deductible if it's incurred in producing your chargeable profits and isn't capital in nature, as set out in the Inland Revenue Ordinance. The Inland Revenue Department (IRD) sets and administers these rules, so it's worth checking their guidance for your situation.

Tax laws can change from year to year. If you're unsure what you can claim, check with an accountant or the IRD before you file.

What business expenses are tax deductible?

Most costs you incur to earn your business income can be deducted, provided they meet the general deductibility test. Common deductible expenses include:

• rent for your business premises
• staff salaries and benefits
• mandatory MPF contributions
• equipment and depreciation allowances
• business insurance
• business travel
• marketing and advertising
• professional and legal fees

Expenses that are not tax deductible

Some costs can't be claimed, even if you paid them while running your business. The main expenses you can't deduct include:

• private or domestic expenses
• capital expenditure and improvements
• the profits tax itself and any penalties
• costs not connected to earning your business income

Keeping records for your tax deductions

To claim a deduction, you need proof that the expense was real and business related. Keep your receipts and invoices for everything you plan to deduct.

In Hong Kong, you must keep your business records for at least 7 years under the Inland Revenue Ordinance. Good bookkeeping habits make this easier and keep you ready if the IRD asks to see your records.

Keep on top of your deductible expenses with Xero

Tracking receipts, invoices and expenses by hand takes time you'd rather spend on your business. Xero brings your records together in one place, so your deductible expenses stay organised and ready at tax time. Get set up and you can get one month free.

FAQs on tax deductions

Here are answers to frequently asked questions about tax deductions.

What is the difference between salaries tax and profits tax deductions?

Profits tax deductions are business expenses a company or sole trader claims against its chargeable profits, while salaries tax deductions are personal allowances and specific deductions an individual claims against employment income. The rules and eligible items are set separately for each.

Can I deduct expenses that are partly personal?

Yes, you can generally claim the business portion of a cost that's used for both business and personal purposes. For example, if you use your mobile phone for business 80% of the time, you may be able to deduct 80% of the cost.

How long do I need to keep records for tax deductions?

You must keep your business records for at least 7 years under the Inland Revenue Ordinance. That includes receipts, invoices and other proof for every expense you deduct.

Do tax deductions reduce my tax bill directly?

No, a deduction lowers your taxable income rather than cutting your tax bill dollar for dollar. Your actual saving depends on the tax rate that applies to the income the deduction reduces.

Related terms

• Operating profit
• Gross profit
• Net profit
• Capital expenditure
• Fixed assets

Learn more about tax deductions

• What is bookkeeping?
• Starting a business
• Claim expenses
• Xero accounting glossary